Success for Ireland in Bond Market

By

Eamon Quinn,

Paul Hannon and

Serena Ruffoni

Updated March 13, 2013 11:40 a.m. ET

DUBLIN—Ireland Wednesday sold a larger-than-expected €5 billion ($6.52 billion) of 10-year bonds, a strong indication that investors will be willing to finance the government after the last of its bailout loans are disbursed later this year.

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Ireland's return to the international bond markets marks a rare success for the euro zone in tackling its fiscal and banking crises. While others have faltered, the Irish government has stuck to its targets for cutting its budget deficit, while its economy is set to grow for the third straight year, albeit modestly.

After the huge cost of bailing out its stricken banking system pushed the government to the edge of bankruptcy, Ireland was forced to seek €67.5 billion ($87.98 billion) in loans from the European Union and the International Monetary Fund in late 2010.

The last of those loans will be disbursed later this year, and the government hopes to be able to finance itself fully from the bond markets in 2014. The sale of 10-year bonds for the first time since entering its bailout was a big step toward achieving that goal.

"There has been an extraordinary response to it," Minister of Finance Michael Noonan said of the bond offering. "And I do not think you will have heard me using the word extraordinary before about anything."

Mr. Noonan said the offering means the government has to borrow just €1.5 billion more in order to have raised the funds it requires until the end of 2014.

"That puts us in a very strong funding position," he said.

Moody's Investors Service said the sale of the bonds was "a credit-positive step in Ireland's ongoing efforts to regain market access, as the economic adjustment programme nears its close."

The bonds will yield 4.15%, less than the initial target of 4.25%, leaving Ireland's cost of borrowing below that of the Italian and the Spanish governments, neither of which have yet faced the ignominy of having to turn to the EU and IMF for financial help.

The gap between Irish and Italian yields widened Wednesday following an auction of Italian government bonds that met with tepid demand, reflecting political uncertainty and a recent downgrade of Italy's debt rating.

With Italian bonds continuing to flounder, the extra yield demanded by investors to hold 10-year Spanish government bonds instead of Italian sovereign debt narrowed to 0.05 percentage points, having stood as wide as 0.75 percentage points just before the Italian election.

In contrast to Italy, Ireland appears to have a clear political commitment to completing its austerity program.

"Ireland at the moment is benefiting from enhanced demand that would probably have gone to Italy," said Dan Loughney, global portfolio manager at AllianceBernstein, which has $230 billion of bonds under management. "Ireland...stepped in to provide a good buying opportunity for investors wanting exposure to Europe and good yield, but not too much risk."

Ireland had sought to sell bonds with a value between €2.5 billion and €3 billion. But the offering attracted more than €12 billion in bids from investors, and the government chose to borrow more than it had intended.

"The market has been waiting for this issue over the last number of weeks and a 10-year issue fills a natural maturity gap in Ireland's funding profile," said Ryan McGrath, senior bond trader at Cantor Fitzgerald Ireland.

The proceeds from those sales will build a backstop for the government as it attempts to become financially self-reliant next year.

In recent weeks, the Irish government has made significant progress in reducing its borrowing needs in the years after its bailout ends. In early February, it secured approval from the European Central Bank to lengthen the repayment period for half of the debts it incurred in bailing out the nation's banks, a move Dublin said would cut its borrowing needs by €20 billion over the coming decade.

The government has also secured an agreement in principle to lengthen the repayment period for loans it has received from the EU, although the details of the new schedule have yet to be agreed.

The government hopes that the 10-year issue and another long-term offering later this year will make it eligible for help from the ECB's still-untested program of bond purchases, known as Outright Monetary Transactions, which would in turn help push its borrowing costs lower. "If there is some clarification forthcoming from the ECB as to whether Ireland has reached the bar required to qualify for OMT, then Ireland should be home and hosed on exiting the bailout program this year," said Lorcan Roche Kelly, chief European strategist at research firm TrendMacro.

But the ECB has been wary of either giving details of how that program would work in practice, or activating it, and bond-market analysts doubt Ireland will succeed.

"As long as the OMT is never used, it can be all things to all men and there are no limitations or issues involved in its implementation," Rabobank said in a note Wednesday. "As soon as it is used these will become apparent and the ECB is unlikely to risk this for a country other than one the size of Italy or Spain."

Rabobank also pointed out that since Ireland can now borrow more cheaply than Spain and Italy, "there is arguably no need for the benefit that may be had from OMT purchases."

Ireland's National Treasury Management Agency started to re-engage with the bond markets last summer. But while yields on government bonds have fallen sharply over the past 18 months, the country faces the challenge of financing gross debts that are expected to peak this year at approximately €200 billion, or 120% of the country's annual economic output, while domestic demand remains weak in the face of continued austerity, and any further slowdown in major export markets—such as the U.K.—could lead to even slower growth.

"Longer-term we would be more circumspect about the sustainability of Irish debt, but in the near-term they are riding the crest of a wave," said Martin Harvey, fixed income fund manager at Threadneedle.

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